RECEIVING REMUNERATION AS DIRECTOR?  CHECK - IS GST APPLICABLE ON IT UNDER REVERSE CHARGE!!

 BACKGROUND:

One of the highlighted issued come around to all corporates that, Is remuneration paid to directors or any kind of payment to director liable to GST under reverse charge Mechanism U/s 9(3)of CGST Act 2017 ?

This issue has been circulated between corporates and professionals after coming following AAR:

ü  Advance Ruling Authority, Rajasthan, in case of Clay Craft India P Ltd. In re [2020] 116 taxmann.com 114 (AAR-Rajasthan), held that GST is payable by company under reverse charge on remunerate paid to whole-time/executive directors also.

ü  Similar decision was given in Alcon Consulting Engineers P Ltd. In re [2019] 110 taxmann.com 357 (AAR - KARNATAKA).

We should not get surprised with the above decision as it has been observed that AAR has given numerous decisions in favor of the revenue, irrespective of the intension of the law and without considering the relevant facts and law. Both above cases are pure example of the same.

Now I would like to share my opinion with available law and facts as follows:

FIRST CHECK: IS REMUNERATION PAID TO DIRECTOR ELIGIBLE TO SUPPLIES AND LEVIABLE TO GST ?

Section 9(1) of CGST act and section 5(1) of IGST act are levy sections, through which we have to check the facts; Is GST is applicable on remuneration paid to director by a company?

Relevant Extract from section 9(1) of CGST act and 5(1) of IGST act as follows:

Section 9(1) of CGST act Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent, as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person

Section 5(1) of IGST Act Subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent, as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person

Under both the sections for qualification of taxability exists only when if there are supplies of services and that can be check through section 7 of CGST Act.

While reading of section 7(1)(a) we conclude that all forms of supply of services such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business, is qualify for  supplies.

But section 7(2)(a) read with part 1 of Schedule -III override the section 7(1) specifically and summaries as :

Section 7(2)(a) read with para 1 of Schedule –III; Notwithstanding anything contained in sub-section (1),  Services by an employee to the employer in the course of or in relation to his employment are not to consider as supply and not to qualify for GST taxability.

So if there is relationship of employer and employee exist between director and company then, gst is not applicable and question of further reverse charge of the same not arises.

Now we have to understand the relationship of director with the company.

Question: Who are director/ whole time director/ Independent director/ non-executive director?

Question: Is director called to be employee or agent of the company? If yes then what are the conditions?

The definition of director nowhere given under the GST act , so we refer to company act and other relevant act  :.

Thus, ‘executive director’ and ‘whole-time director’ mean the same thing. Test whether a director is employee – In employment, there is master servant relation. It is contract of service for employment. The normal rule tests are for employment  – (a) Whether TDS of income tax is on basis of salary under section 192 of Income Tax Act (b) whether provident fund and ESI is deducted and paid where applicable (c) whether he is eligible for gratuity (d) Terms for removal from company (e) Nature of agreement with the director.

SECOND CHECK: GST LIABILITY TO BE DISCHARGE UNDER REVERSE CHARGE FOR PAYMENT TO DIRECTOR

Notification No. 13/2017-Central Tax (Rate), dated 28-6-2017 as amended vide sl. no. 6 makes the company or a body corporate located in the taxable territory being recipient liable for GST for the receipt of services supplied by a director of a company.

In my opinion this reverse charge provision is applicable only when the services provided by director are applicable to GST charging section. And the salaries given by company to director for his employment are cover under this clause.

RELVANT LAW AND CASES

We have to draft relevant law as under for our initial understanding

ü  ESIC v. Apex Engineering Ltd. 1997 LLR 1097 (1998) 1 Comp LJ 10, 1998(1) SCC 86, it was rightly held that for purpose of ESIC, company is the 'owner'. The MD is not the 'owner'. Even if the MD is declared as 'Principal Employer' to ESIC, he can still be an ‘employee”

ü  If a director is performing duties and is working for the company, he will come within of an ‘employee’ – Monitron Securities v. Mukundlal Khushalcnand 2001 LLR 339 (Guj HC).

ü  In Ram Prasad v. CIT AIR 1973 SC 637 (1972) 42 Comp Cas 544- 86 ITR 122 (SC), it was observed as follows, ‘A director of a company is not a servant but an agent inasmuch as the company cannot act in its own person but has only to act through directors who qua the company have the relationship of an agent to its principal. A Managing Director may have a dual capacity. He may both be a Director as well as employee, depending upon the nature of his work and the terms of his employment. Whether or not a Managing Director is a servant of the company apart from his being a Director can only be determined by the articles of association and the terms of his employment.

FAQ :

We have to ask some questions from us and try to understand from them under the light of relevant provision before concluding the fact that remuneration paid to whole time director is liable to GST under reverse charge:

Question 1: To whom Advance ruling by AAR is applicable?

Answer: As per section 103 of CGST act :

103. (1) The advance ruling pronounced by the Authority or the Appellate Authority under this Chapter shall be binding only—

So AAR is not applicable to all in equal.

Question 2: Who is director or whole time director?

Answer: A director who engaged in company under employment as per company act and article of association.

Question 3: Who is employee of the company and getting salary?

Answer: A person who are appointed as employee for working for the company and getting remuneration for its services. An employee can also be director of the company.

OPINION

In case of services supplied by a director of a company or a body corporate to the said company or the body corporate, the company or the body corporate located in taxable territory is liable to pay GST under reverse charge - Notification No. 13/2017-CT (Rates) and 10/2017-IT (Rates) both dated 28-6-2017, effective from 1-7-2017.

It may be noted that the ‘reverse charge’ provision does not impose any levy of GST. It only transfers the liability of payment of GST from supplier of goods/services to recipient of goods/services

The reverse charge provision can apply only when, in absence of the provision of reverse charge, the supplier of service is liable. Thus, if supplier of service is not liable to pay GST, the recipient cannot be made liable to pay GST.

Suggestion: In my suggestion we all should maintain proper document facts that executive director are under the employment of the company and satisfying with following:

1. Director should part of the all employment policies.
2. Should comply with the TDS provision and PF.
3. Should specifically mention in article of association and contract of appointment about the employment of the executive directors.

(For Any Queries and Feedback relating to any GST queries please contact at bhardwaj.casanjay@gmail.com)

About Author

CA Sanjay Bhardwaj

FCA, B.com

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